US RATE FUTURES-Brace for big Fed cut after CPI drop

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By Ros Krasny

CHICAGO, Dec 16 (Reuters) - U.S. short-term interest rate futures were near steady after news of a record decline in U.S. consumer prices and weak housing starts for November, still pointing to a expectations of a big rate cut when the Federal Reserve ends its policy meeting on Tuesday.

The data "is decidedly bond-friendly and easily paves the way for a more concerted effort at the Fed to jump-start the economy," said strategists at 4CAST Ltd.

Futures fully price a 50 basis-point cut to the fed funds rate, to 0.5 percent, and show a 64 percent perceived chance the Fed could slash rates by 75 basis points, down from 68 percent late on Monday.

As the benchmark rate approaches zero, dealers expect more "quantitative" measures from the Fed. But many doubt that Tuesday's post-meeting statement will contain any specifics on the path forward.

The U.S. Labor Department said consumer prices tumbled by 1.7 percent in November as energy prices continued to slide.

Gasoline prices were down 29.5 percent on the month, while home heating oil prices fell by 13.6 percent.

The core consumer price index, stripped of food and energy, was steady on the month against forecasts for an increase of 0.1 percent. That took the year-on-year core increase to 2.0 percent, continuing a decline from its cyclical peak of 2.5 percent hit in the year through August.

"The overall core number at 0.02 percent is not quite deflation, but will do nothing to erode pervasive market fears that this is exactly where we are heading," said Alan Ruskin, chief international strategist at RBS Greenwich Capital in Greenwich, Connecticut.

Also on Tuesday, government data showed U.S. November housing starts tumbled by 18.9 percent to a 625,000 unit annual rate, far below the consensus forecast of 740,000.

"This is mind-bogglingly awful," said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York.

Values in rate futures also reflect cash fed funds values that have consistently traded far below the target rate for several months. The cash fed funds rate last traded at 0.125 percent, versus the target of 1 percent. (Editing by James Dalgleish)